Demand shocks and market manipulation

In this paper, we analyze the conflicts of interest of an informed agent who is responsible for divulging his private information about a company and has a reward function positively dependent on its stock price. We assume that the demand for the stock is subject to shocks that may increase it. We show that the presence of this “captive demand” leads to increased incentives to misrepresent the truth and manipulate the market. As an application, we investigate the case where the shocks represent the degree of social interactions among employees of a company whose CFO is the informed agent.